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M&S Investors Bank on Next-Style Cash Returns as Sales Decline

Marks & Spencer store in Manchester | Source: Shutterstock
  • Bloomberg

LONDON, United Kingdom — Marks & Spencer Group Plc Chief Executive Officer Marc Bolland doesn't make as much money selling clothes as smaller rival Next Plc. To soften the blow, some investors would like him to mimic his competitor's record on giving back cash.

“One way for Bolland to make it easier for shareholders to swallow the bitter pill on poor trading would be to bring forward the discussion on shareholder returns,” said Richard Marwood, who helps oversee more than $700 billion in assets at Axa Investment Managers including Marks & Spencer. “If you look at Next, a significant proportion of the earnings growth has been due to the share buyback.”

Next has handed back about 30 percent more to shareholders since 2010, the year Bolland took the top post at M&S, in the form of buybacks and dividends. That’s helped the stock almost triple in a period when M&S shares have gained 18 percent and the company has only paid out dividends. By increasing the pace of capital returns, Bolland can win favor from shareholders losing patience over the retailer’s failure to reverse more than two years of declining clothing sales, according to investors including Marwood.

Next’s per-share earnings have risen at an average annual pace of 13 percent over the past five years, outpacing sales growth of 1.3 percent, according to data compiled by Bloomberg. M&S’s EPS have fallen at an average pace of 9.9 percent over the same period even as the expansion of the retailer’s food business has caused sales to grow at a rate of 2.1 percent.

Past Underinvestment

M&S advanced 2 percent to 470.3 pence at 10:57 a.m. in London trading, extending yesterday’s 3.6 percent gain, as investors looked beyond the decline in general-merchandise sales to focus on the prospect of increased returns, a possibility Bolland first teased at in May last year after announcing a significant cut to capital spending.

Next’s pretax profit will overtake that of M&S next year, according to analyst estimates compiled by Bloomberg, helped by a business model that’s adapted more quickly to the shift in shopping habits toward online shopping. While Next Directory has grown to become the U.K.’s biggest home-shopping business, Bolland is still working to address past underinvestment that saw M&S fall behind competitors in online retailing.

Speaking on a conference call yesterday, Bolland congratulated Next for “doing a better job” over Christmas, which led the retailer to raise its full-year profit forecast last week. Next’s market value is now almost 2 billion pounds higher than M&S at 9.5 billion pounds ($16 billion).

Shareholder Returns

Bolland is now counting on a spring/summer fashion collection for men and women and a new online platform to win sales. Internet sales increased 23 percent in the quarter, and were up 32 percent over the Christmas period, Bolland said.

The CEO, who reaches his fourth anniversary in May, yesterday promised to provide more clarity at the company’s May 20 results on a pledge to consider returning more cash to shareholders, a sentiment echoed by his chief financial officer.

“That is what we are focused on, cash and improved returns,” CFO Alan Stewart said on a conference call. The company has paid out 1.05 billion pounds via dividends to investors since 2010.

M&S has said it intends to cut capital spending to 550 million pounds a year from 775 million pounds this year. That, combined with a slowdown in space expansion, will lead to a “material improvement in free cash flow,” it said last year.

Suspending Buyback

Next’s regular returns to shareholders, which total 1.3 billion pounds since 2010, are a function of a business model that’s throwing off increasing amounts of cash. Cash generated from operations in the last fiscal year was 637.2 million pounds, about three times the level of a decade ago, according to data compiled by Bloomberg. M&S generated about 1 billion pounds of cash from operations last year, the data show.

Next said last week that it was suspending its buyback program because the shares had risen above the level it’s prepared to pay. Instead, it will return surplus cash to shareholders in the form of a special dividend, starting with a 75 million-pound payout next month.

While M&S offered discounts of as much as 50 percent before Christmas in response to competitors such as Debenhams Plc and House of Fraser, Next CEO Simon Wolfson held his nerve and didn’t start cutting prices until Dec. 26.

Still, some offer a note of caution. “The bull case is that Bolland can make M&S into a Next, where they eventually start returning cash,” said Jamie Merriman, an analyst at Sanford C. Bernstein in London. “There are a few differences though and I’m not sure it’s going to play out in the way that everyone is expecting. If people are looking for a cash return in 2014, they may be disappointed.”

By Gabi Thesing; Editors: Paul Jarvis, Celeste Perri.

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